It should hardly come as a surprise to anyone that the new Nasdaq board diversity rule (see this PubCo post) would be challenged in the courts. The rule was approved by the SEC on Friday, August 6. On Monday, August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. The petition itself is not particularly revealing, but it’s notable that the petitioner is also the most recent plaintiff challenging California’s two board diversity laws.
The Alliance’s press release states that
“the Nasdaq rule will compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation in selecting directors…. Nasdaq tries to shame companies into compliance by requiring that any company failing to meet these quotas must publicly ‘explain why.’
“According to Nasdaq and the SEC, this approach helps investors and will improve firm performance. As AFFBR explained in a comment submitted to the SEC, Nasdaq’s discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable. Further, the rule will not deliver the promised benefits. As Harvard law professor Jesse Fried has explained, numerous studies have shown ‘that stock returns suffer when firms are pressured to hire new directors for diversity reasons.’
“It is not only investors who will suffer if Nasdaq’s virtue signaling rule is allowed to take effect. AFFBR has members who, because of their race, sex, and sexual orientation are forced to compete on an uneven playing field because of Nasdaq’s quota requirements.”
Exchange Act Section 25(a) permits a “person aggrieved by a final order” of the SEC to obtain review of the order in the U. S. Court of Appeals for the circuit in which he has his principal place of business, by filing, within 60 days, a written petition requesting that the order be modified or set aside in whole or in part. The SEC is then required to file the record on which the order is based. The SEC’s findings of fact, “if supported by substantial evidence, are conclusive.” The “court has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part.” However, either party may apply to the court “for leave to adduce additional evidence,” and the court may decide to remand the case to the SEC for further proceedings. The filing of a petition does not operate as a stay of the SEC’s order or rule; however, the SEC or, when the court gains exclusive jurisdiction, the court, could issue a stay.